SEATTLE $15 MINIMUM WAGE: SOLVING FOR …

1 KEYNOTE | Archbright. All Rights Reserved | Revised 12/15/2014 | Page 1 SEATTLE $15 MINIMUM wage : SOLVING FOR SALARY COMPRESSION The dramatic SEATTLE MINIMUM wage increase to $ per hour is causing concern with quite a few organizations, especially those in the service, manufacturing and hospitality industries. Despite the gradual phase in period of three to seven years, at the end of the adjustment period, SEATTLE s MINIMUM wage is predicted to be more than 50% higher than the state s MINIMUM wage . Some organizations are alarmed at what this means for their bottom line, recruitment and retention, and future growth opportunities. Undoubtedly, three reactions will be prevalent: 1. Proactive Stance: I know I need to increase some employee pay rates to $ per hour. I will crunch the numbers and see what it costs, plan for those expenses, and I ll be all set.

2 2. Procrastinator Stance: I still have a few years before the impact; I am not going to worry about it. 3. Complacent Stance: Thankfully, it doesn t impact us at all. We already pay our employees more than $ per hour. This KeyNote will address these possible reactions, misconceptions and how shrewd organizations can adjust their compensation strategy, policies and practices to weather this change. Reactions and Misconceptions Proactive Stance These organizations may be busy calculating costs, figuring out the total price tag to raise low income employees to at least $ per hour and thinking about how to phase this in over time. Some may arrive at a number, budget accordingly, and then stop. That is their first mistake. Why? The cost to move employees to the new MINIMUM rate is just the first step. There are more costs to consider, due to what is commonly referred to as Salary Compression.

3 World at Work, the nation s leading Compensation organization, defines salary compression as pay differentials too small to be considered equitable . Put differently, salary compression occurs when there is little to no difference in pay between employees, yet a significant difference in skill, knowledge or responsibilities. Sometimes salary compression is seen when subordinates earn more (after incurring overtime, for instance) than their supervisors. Other times this can be seen when employees in a lower graded job , or a job with fewer responsibilities, earn more than employees in a different job that is more complex. Clever managers will realize that increasing their lower level employees to $ per hour will cause the pay of lower paid employees to bump up against the pay of employees in jobs with a higher skill set, or more responsibilities.

4 Where previously a job with a relatively low skill set could be paid $11 or $12 per hour, and a job with a moderate skill set could be paid $15 or $16 an hour, now the jobs could all be paid within a few percentage points of each other. Likewise, after assessing overtime usage in their organization, managers may realize that the new overtime rates will cause subordinates gross pay, overall, to be more than their supervisors. Some may not understand that this is a problem since salary compression is not illegal and the wages are high. However, allowing salary compression to enter an organization does not make good KEYNOTE | Archbright. All Rights Reserved | Revised 12/15/2014 | Page 2 business sense. It is an expensive risk that can cost an organization much more in the long run. Salary compression can lead to a host of organizational challenges, such as: Low employee morale Poor employee retention Decreased employee engagement Loss of productivity Weakened trust in leadership Decreased overall job satisfaction Damaged work relationships Reluctance for potential supervisors to accept promotions Studies show that employee morale and retention are impacted the most by systematic cases of salary compression.

5 (May 2009 survey by Pearl Meyer & Partners, Salary Compression Practices in the United States). Much of this is intuitive: Employees can feel demoralized and resentful when they are paid the same, or close too, another employee who has what they see as an easier job. This can cause employees to be more receptive to moving on when they see a job opening, or will propel them to actively enter the job market. Yet even if they chose not to actively seek a new job, it is likely they will become disengaged with their current job, leading to lack of productivity. In addition, when employees do not feel that they are fairly compensated, they are less likely to trust leadership and more likely to experience overall job dissatisfaction. Why might salary compression lead to damaged work relationships? Consider the difficulty new employees may face when being hired at a pay level higher than their peers doing the same type of work.

6 If pay rates are known as they often are the new employee may face an environment that is uncomfortable or unproductive. In addition, when supervisors are faced with hiring subordinate employees who, with overtime pay, are compensated at a higher rate, this can also create a tense working environment. (There are some situations, it should be noted, where Supervisors willingly accept a pay rate lower than a subordinate. Some examples are specialized IT or scientific positions.) Lastly, salary compression may also cause difficulty when management wants to promote from within. Potential supervisors, when considering an upward job change, may be faced with the prospect of a higher level job that is more complex, with more stress, yet brings home less pay after overtime pay. Unless they feel that this will be a temporary situation, it is quite possible they will turn down the opportunity.

7 Some executives will counter that pay is private and if employees do not know what others are being paid, pay disparity issues will not surface. Experts report this is no longer true. In the December 2009 edition of Workspan, the influx of Millennial/Gen Y workers has rendered such discretion a thing of the past. (Addressing Salary Compression in Any Economy by Rebecca Manoli, Workspan 12/09). Younger generations have fewer qualms about sharing their pay rates with co-workers, friends, even strangers on the Internet and social media. Managers should no longer assume that salary rates are kept confidential just because they are a private employer, or do not have published salary ranges. Plus, many managers have learned the hard way that negative perceptions of salary inequality can be damaging whether true or not.

8 Procrastinator Stance It is a bad idea to wait and allow other organizations the competitive advantage. Smart employers will begin developing a plan now regarding how to phase in the salary increases, both the movement to $ per hour and any resulting increases needed to address salary compression. They will identify the possible areas of salary compression, assess the costs, review their history of overtime payments, make adjustments to staffing levels, take a close look at the productivity of their KEYNOTE | Archbright. All Rights Reserved | Revised 12/15/2014 | Page 3 workforce, decide what compensation structure changes are needed and have a multi-year plan to balance all factors. Complacent Stance While an organization may already comply with the MINIMUM wage rate, once an organization considers the broader market, their competitors, and how the overall wage increase will change the competitive labor landscape, ignoring the impact of the new law may be unrealistic.

9 Consider the problem through the lens of a SWOT Analysis: Strength, Weaknesses, Opportunities and Threats. If an organization already pays employees more than $ per hour, this is a strength. The organization is not faced with the same type of short-term costs that other organizations may be faced with. That said, ignoring salary compression will quickly cause an organizational weakness: low morale, retention concerns, and decreased employee engagement are just a few likely results. When considering threats, realize that competitors may be taking this moment to assess their salary levels and make alignments to the market. Competitors may be planning to increase pay for positions that are prevalent in your organization. This will impact the pay levels for all positions in the local market, causing employees to seek work in those organizations that have already taken care of salary compression concerns.

10 Suddenly, your organization has a greater retention concern. Yet with every threat comes an opportunity. By carefully considering the points in this KeyNote, and addressing them thoughtfully, you have the opportunity to get ahead of the pay compression problem. Your organization has the opportunity to be the proactive employer in your industry, with its finger on the pulse of the labor market. What Organizations Can Do Experts agree that pay compression is much easier to avert than it is to fix. Your organization has time to plan, if you start promptly. The suggestions below are just a sample of what your organization can do to weather this change. 1. Develop a compensation strategy that addresses Salary Equity. Successful companies will develop a solid compensation philosophy that addresses the organization s outlook on internal equity.